Boeing scrambles to avoid losing American Airlines deal to Airbus

Boeing has made a last-ditch offer to sell American Airlines updated 737 jets with next-generation engines as it scrambles to prevent a strategic Airbus victory in a massive order from the longtime Boeing customer.

An American Airlines Boeing 757 jet takes off from Miami International Airport. American has lost money every year since 2007, so financial terms of the jet deal are critical.

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American Airlines

Solid customer: American has bought only Boeing since 1996.

Aging fleet: It flies a lot of older, fuel-guzzling jets, including more than 120 Boeing 757s and nearly 250 MD-80s.

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Boeing has made a last-ditch offer to sell American Airlines updated 737 jets with next-generation engines as it scrambles to prevent a strategic Airbus victory in a massive order from the longtime Boeing customer.

The offer is a striking turnabout from signals all year that Boeing executives preferred to design an all-new small airplane that could replace the Renton-built 737 toward the end of the decade.

American is expected to announce Wednesday its order for more than 200 single-aisle planes, likely split between the Airbus A320neo and the rival 737.

According to three industry insiders, who spoke on condition of anonymity, Airbus came close to winning the entire order. Before anyone at Boeing knew about it, last month the airline signed an initial memorandum of understanding to buy A320neos, which will come with new fuel-efficient engines.

To head off that loss, within the last 10 days Boeing gave American a new proposal that offers the 737 jet equipped with similar engines, the sources said.

Boeing sales teams worked furiously the past weekend to salvage the deal, according to a person with knowledge of the developments.

"Boeing is putting up a real fight," he said, "But at best, they'd hope to get some kind of a split buy."

Last-minute negotiations with American continued in advance of a decisive board meeting of the airline's parent company Tuesday evening.

Bloomberg News reported the deal could be as big as 400 airplanes.

Upside for Airbus

A split order could mean Boeing replaces part of the carrier's aging fleet of almost 250 MD-80s with a mix of current and re-engined 737s, while Airbus replaces American's fleet of more than 120 larger 757s with A321neos.

Winning even that much would be a tremendous win for Airbus.

The A320 and 737 families of jets now divide the bread-and-butter single-aisle jet market evenly. But a big Boeing customer defection would suggest the A320neo could tilt that market share significantly.

And Airbus may do better than an even split of the American deal. A second person, with knowledge of the sales talks, said Boeing's late offer could still prove "too little, too late," with the majority of the order going to Airbus.

"Unless something dramatic changes today, this a done deal for Airbus," said that person.

He said the Boeing offer lacked detailed data on the cost of the re-engined airplane, and the Boeing board has not given its go-ahead.

"American's feeling has been, 'You guys (Boeing) haven't got your act together. You're giving us something on a piece of paper that isn't anywhere near as far along as Airbus,' " he said.

Through most of this year, Boeing executives have said that re-engining the 737 was less likely than the favored alternative option: building an all-new small airplane that could enter service around 2020.

To develop a re-engined 737, the wings have to be modified to hold the bigger, heavier engines, and the landing gear may have to be raised so the engine pods don't scrape the ground.

Boeing believes it can do that for about $2 billion, according to a person familiar with the internal debate. A new airplane would cost upward of $10 billion.

A re-engined 737 would continue to be built in Renton through at least 2025. When a new airplane is eventually launched, Washington will have to compete against other states to be the site of final assembly.

Despite intense pressure from customers, Boeing said repeatedly it wouldn't even formally choose between these options until later this year.

Airbus, by contrast, announced its plan last December, saying the first of its new A320neo family would enter service by late 2015.

Air show fallout

It now looks as if the American order, closely following a cascade of orders for A320neos at the Paris Air Show, has precipitated an early decision by Boeing.

"Airbus forced their hand," said the first source.

Airbus announced more than 700 orders and commitments in Paris for its plane, a success that respected aviation analyst Richard Aboulafia of the Teal Group this week called a "shock and awe sales campaign."

He concluded Boeing has been too slow to realize it's not the next new airframe, but the next generation of fuel-efficient engines, that will provide most of the technological progress that matters to the airlines.

"If Boeing hasn't learned this lesson, it needs to," Aboulafia wrote in a report this week.

A study released this month by industry consulting firm AirInsight concluded that in particular the A321neo is a good candidate to replace the older 757s in many fleets, including American's.

Industry analyst Scott Hamilton, a co-author of the AirInsight report, cited unnamed company insiders Tuesday on his Leeham.net blog saying that the re-engined 737 is now targeted to enter service in 2017, more than a year later than the A320neo.

But Hamilton said Boeing still plans to go ahead with the new small airplane as well, no more than a year or so later than originally planned.

One of the people with knowledge of Boeing's thinking said the target for an all-new plane is 2022, but described that as just a "placeholder" that could get pushed out further at a later date.

Financing is key

To hold off Airbus with American, Boeing has to match the European plane maker in more than engine technology.

American has lost money every year since 2007, so the financial aspects of the deal are crucial.

Ironically, the close historical relationship between Boeing and American could leave the aircraft maker in a bind as it reduces its price to win the deal.

In 1996, Boeing signed landmark agreements with American, Delta and Continental for "most favored customer" status — guaranteeing them the lowest prices on any jet sales.

Boeing knows that whatever discount it sets for American will trigger the same for Delta and possibly for United, which merged with Continental. A low bid could undermine Boeing's pricing for many hundreds of other jets.

People working on the deal inside Boeing heard from American that the Airbus offer minimized the airline's upfront costs by arranging to lease a large portion of the jets.

That would mean American pays monthly rent on the Airbus jets as it uses them, rather than buying them outright.

To counter that, Boeing likely can enlist leasing companies such as GECAS, the airplane leasing arm of General Electric, to back its bid. Boeing would equip its revamped 737s with the new LEAP engine from GE/Snecma.

The complex final details of such financing could determine the outcome of the American order.

Whatever the outcome, said the first source Tuesday, "It's going to be a blockbuster of an order. ... We'll know in 24 hours."

Another warned that such deals often are fluid until finally signed.

"Last week, I was convinced Airbus was going to win this, and that Boeing would stick to its strategy of going for a new airplane. A week later, it's a split buy and Boeing has changed its strategy," he said. "This still could have some twists and turns."